There was a excellent article in the Sunday Times a couple of weeks ago by Brian Carey on how this restructuring basically sucks and amounts to another bailout of the bank by the State. The article is behind a pay wall but it is well worth a read if you can get your hands on it.
"Don’t buy AIB shares. Michael Noonan says they’re overvalued"
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Duke of Marmalade
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A most peculiar comment from Sunny - not his(her) usual. AIB is us (or at least 99.8% of it is) so any "trousering" is to our benefit. Unless Sunny means that (s)he thought this money would be used to forgive poorly performing debts - that would suit some of course, but not the taxpayer in general.
To clarify, I am not making wild claims about any trousering! The article explains the reality of what this announcement means. The consequences of the financial engineering employed are a lot different than what the Government would like us all to believe when they announced a small windfall for the State. It also quiet rightly points out the difference in how BOI and AIB have dealt with their preference shares. I will try and do up a summary of the points. Just thought it was really interesting take.
The Government have made a big deal about this payment but the detail of it is interesting.
Remember this relates to €3.5 billion of preference shares that incurred a step up because AIB didn't repay last year so they actually owed the State €4.4 billion on the shares. The EU gave approval for AIB to repay €1.3 billion of these shares at a cost of €1.7 billion.
The remainder of the preference shares are to be converted into ordinary shares of AIB. So in reality what we have is our Government selling a interest in a highly profitable and income producing instrument i.e. The preference shares and investing €2.7 billion into shares that Michael Noonan said himself not to buy because they were overvalued.
The article also points out that unlike BOI, AIB paid one coupon on the preference shares in the five years since they were issued. These missed coupons have also been converted into ordinary stock to the tune of over €1 billion.
While all this doesn't mean that AIB won't pay back the money eventually, it does mean we will be s long time time waiting for it. The article points out that while removing the preference shares increases the value of the bank, it won't increase it to the tune of €2.7 billion to cover the States investment when they go to sell a piece next year.
We are getting cash from AIB but we are still bailing them out as well. Hardly reason for the Government or AIB to be clapping themselves on the back.
Remember this relates to €3.5 billion of preference shares that incurred a step up because AIB didn't repay last year so they actually owed the State €4.4 billion on the shares. The EU gave approval for AIB to repay €1.3 billion of these shares at a cost of €1.7 billion.
The remainder of the preference shares are to be converted into ordinary shares of AIB. So in reality what we have is our Government selling a interest in a highly profitable and income producing instrument i.e. The preference shares and investing €2.7 billion into shares that Michael Noonan said himself not to buy because they were overvalued.
The article also points out that unlike BOI, AIB paid one coupon on the preference shares in the five years since they were issued. These missed coupons have also been converted into ordinary stock to the tune of over €1 billion.
While all this doesn't mean that AIB won't pay back the money eventually, it does mean we will be s long time time waiting for it. The article points out that while removing the preference shares increases the value of the bank, it won't increase it to the tune of €2.7 billion to cover the States investment when they go to sell a piece next year.
We are getting cash from AIB but we are still bailing them out as well. Hardly reason for the Government or AIB to be clapping themselves on the back.
Duke of Marmalade
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Sunny that is so not right that I am disappointed in you
Michael Noonan said the shares were overpriced by the market. Getting shares for 1.7cents was a steal, no wonder the price of the shares in free float collapsed. If anything, current AIB shareholders have cause for gripe. The market price of these shares was €7. In any ordinary situation prefs would be converted at market price. To get a conversion at 1.7c was another steep dilution in the value of the free float.Sunny, whether the original bail out of depositors and bondholders was justified has been argued intensely over the last 7 years. It is also valid to argue whether the timing is right for the sale of part or all of AIB just now. But for Brian Carey to argue that this restructuring amounts to another bail out by the taxpayer beggars belief. Notice how nobody else has run with this theme, not even seasoned baiters like McWilliams. The restructuring is at worst a technical cleaning up for sale but possibly also reflects a further rip off of existing AIB shareholders by the taxpayer - I'm not complaining. There is no smoking gun here.
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Sorry Duke, I am disappointed in you! What professional fund manager would have taken €2.76 billion worth of income generating preference shares with a 8% dividend and convert them into non dividend paying ordinary shares? It has to be done to clear up the mess of a balance sheet of AIB but it doesn't make financial sense as an investment
Bank Of Ireland repaid every preference share in cash back to the State. They repaid every coupon back in cash to the State. During the 5 years that we had the preference shares in AIB, we received a cash dividend once. And that was this year. Every other coupon was converted to ordinary shares. Now another €2.7 billion has been converted into ordinary shares. So instead of having a situation where AIB owes the Government €2.7 billion because the preference shares are basically debt, the recovery of this cash is now completely dependent on finding buyers for this bank who are willing to pay a decent price. You might think that getting ordinary shares at 1.7c is a steal but I will bet you now that when the Government sells a stake in AIB next year, it will be at a discount to what we have invested as buyers will be looking at this conversion.
This isn't saying that Government has put more money into AIB or will never get it's money back but lets stop with the political rubbish that this represents a huge step in AIB not being dependent on the State and repaying the funds. We are decades away from getting our money back from AIB and this payment that has been hugely publicised was nothing more than necessary financial engineering. We are still bailing out AIB and one only needs to look at BOI to see the difference.
Bank Of Ireland repaid every preference share in cash back to the State. They repaid every coupon back in cash to the State. During the 5 years that we had the preference shares in AIB, we received a cash dividend once. And that was this year. Every other coupon was converted to ordinary shares. Now another €2.7 billion has been converted into ordinary shares. So instead of having a situation where AIB owes the Government €2.7 billion because the preference shares are basically debt, the recovery of this cash is now completely dependent on finding buyers for this bank who are willing to pay a decent price. You might think that getting ordinary shares at 1.7c is a steal but I will bet you now that when the Government sells a stake in AIB next year, it will be at a discount to what we have invested as buyers will be looking at this conversion.
This isn't saying that Government has put more money into AIB or will never get it's money back but lets stop with the political rubbish that this represents a huge step in AIB not being dependent on the State and repaying the funds. We are decades away from getting our money back from AIB and this payment that has been hugely publicised was nothing more than necessary financial engineering. We are still bailing out AIB and one only needs to look at BOI to see the difference.
Hello,
Is it possible that the Government have no choice but to start to sell the Bank, so as to remove it from State ownership and by extension perhaps satisfy EU regulations or similar ?
No doubt that the State would benefit from holding it's shares in AIB and claim dividends, given the Bank is now back in profit etc.
Is it possible that the Government have no choice but to start to sell the Bank, so as to remove it from State ownership and by extension perhaps satisfy EU regulations or similar ?
No doubt that the State would benefit from holding it's shares in AIB and claim dividends, given the Bank is now back in profit etc.
Brendan Burgess
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Sunny,
I think that the point you might be missing is that the state owns over 99% of the bank. So it doesn't matter what it does with the preference shares. The taxpayer is paying the dividend to itself. It could put the rate up to 20% or it could tear up the preference shares - the taxpayers' position does not change.
Look at it another way
Let's say that the AIB ordinary shares are currently worth €10 billion - the state's stake is €12.76 billion when you add in the €2.76 of preference shares.
Now that the preference shares are cancelled, AIB is worth €12.76 billion.
The state's position has not changed.
Brendan
Of course it matters Brendan. Does the taxpayer want cash to bring down debt or to invest in the economy or do they want a couple of extra billion of AIB shares that might be worth something in 20 years time? Nobody is saying that the State's position has changed. But it does mean that it will take longer to recover the extra almost 4 billion that was supposed to be paid in cash but was instead paid in ordinary shares. Ideally the Government wanted cash just like they got from BOI. The EU said that AIB couldn't afford to repay the shares in cash and pay off the €1.6 billion next year as well. For that reason, the Government had to take shares because they want to be able to sell a chunk of AIB next year and the preference shares would hinder that. That's fair enough but lets not pretend this is great news for the taxpayer. We are only getting back a fraction of the cash that AIB owe us.
The simply fact here is we have moved from having a debt like instrument here that should be paying €180m a year in interest to a pure equity investment. I am not accusing the Government and AIB of trickery but I am also not going to join the cheerleading now that we own even more ordinary shares in AIB. The bank is still costing us billions.
Duke of Marmalade
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Sorry Sunny but you have hit a blind spot here. The Boss has explained it far better than me. The restructuring is a clean up. Fairly neutral financially although, as the collapse of the free float share price indicates, it is a further dilution of those shareholders (they deserve what they get given all the warnings), albeit at 0.2% there is not much more blood to get out of them.
Ask yourself why the usual suspects like Prof McWilliams, Prof Lucey, Prof Morgan, Fierce Doherty, Paul Murphy, Shane Ross etc. have not seized on this Brian Carey theme of a second bail out. Back off Sunny, you, unusually, got this one badly wrong, but I'll let you blame Carey.
Ask yourself why the usual suspects like Prof McWilliams, Prof Lucey, Prof Morgan, Fierce Doherty, Paul Murphy, Shane Ross etc. have not seized on this Brian Carey theme of a second bail out. Back off Sunny, you, unusually, got this one badly wrong, but I'll let you blame Carey.